EconoMonitor

Nouriel Roubini's Global EconoMonitor

Reversal of Capital Flows in the Emerging World

The reversal of capital inflows due to deleveraging or losses in financial markets has been one of the most significant effects of the financial crisis on emerging and frontier economies.  After a period in 2007 and 2008 when many emerging markets faced the problem of dealing with extensive capital inflows, now capital flows have reversed.  Private capital flows in 2009 are expected to be less than half of their 2007 levels, posing pressure on emerging market currencies, asset markets and economies.  Countries that relied on readily available capital to finance their current account deficits are particularly vulnerable.  Furthermore, capital outflows pose the risk that governments may react with some type of capital controls or barriers to the exit of foreign investments.

Foreign direct investment (FDI) is considered by many to be a major and more stable source of financing for many developing countries.  FDIs slowed down sharply in recent quarters due to two major factors affecting domestic as well as international investment.  First, the capability of firms to invest has been reduced by a fall in access to financial resources, both internally (due to a decline in corporate profits) and externally (due to lower availability and higher cost of finance).  Second, the propensity to invest has been affected negatively by economic prospects, especially in cases involving corporations with operations in the developed countries which are hit by a severe recession.  In addition, a very high level of perceived risk is leading companies to extensively curtail their costs and investment programmes to become more resilient to any further deterioration of the business environment and their balance sheets.  The fact that many multinational enterprises can easily shift financial resources from one country to another, adds another degree of uncertainty, contributing to the growing macroeconomic instability in developing countries.

The outlook for the flow of portfolio investments is even less encouraging.  Redemptions of US$41.2 billion out of EM equity funds in 2008 have fully reversed the record US$40.8 billion inflow of 2007.  About half of the EM fund purchases that have occurred since 2003 have now been withdrawn.  According to the Institute for International Finance (IIF), net private capital flows to emerging markets are estimated to have declined to US$467 billion in 2008, half of their 2007 level.  A further sharp decline to US$165 billion is forecast for 2009, with just over three-quarters of the decline due to deterioration in net flows from commercial banks.  Moreover, net lending of international banks to emerging countries (excluding Gulf countries) is expected to fall to US$135 billion in 2009 from US$401 billion in 2007 and US$245 billion in 2008.

The World Bank estimates that in 2009, 104 of 129 developing countries will have current account surpluses inadequate to cover private debt coming due.  For these countries, total financing needs are expected to amount to more than US$1.4 trillion during the year.  External financing needs are expected to exceed private sources of financing (equity flows and private debt disbursements) in 98 of the 104 countries, implying a financing gap in 98 countries of about US$268 billion.  Should bank rollover rates be lower than expected, or should capital flight significantly increase, this figure could rise to almost US$700 billion.  Well over US$1 trillion in EM corporate debt and US$2½-3 trillion in total EM debt matures in 2009, the majority of which reflects claims of major international banks extended cross-border or through their affiliates and branches located in emerging markets.

For most of the reasons presented above, a number of emerging economies have recently imposed controls on capital outflows as a way of managing financial crises.  Iceland, Ukraine, Argentina, Indonesia and Russia, among others, have resorted to a number of restrictions on the availability of foreign exchange as a way of dealing with the collapse in global risk appetite.  Although those are frequently used as a way of rationing forex during a crisis, there is a risk that capital controls might become a normal part of policymakers’ tool-kits well beyond strict emergency needs.  In principle, capital controls permit monetary and fiscal policy to be directed to the stabilization of economic activity without having to worry about a collapse of the currency and its deleterious effects on the sectoral and national balance sheets.  The imposition of capital controls should be viewed as temporary, with a gradual relaxation as economic conditions improve and global financial stability returns.  Such controls might restrict the ability to attract capital in the future as foreign investors fear that they will be unable to repatriate their profits

With rising unemployment and falling real wages, remittances will also subside with pressure on the standard of living, growth and external balances of labor-sending countries.  In addition to these private capital flows the reduction of official flows, including development assistance is also set to slow as donors scale back their funding in the face of greater domestic needs.  However funds available from multilateral institutions like the IMF and regional development banks may partly offset the decline in other funds and withdrawal of private capital.  The G20 seems to have neared an agreement on doubling or tripling the IMF’s lending capacity and regional development banks like the EBRD, ADB and others are boosting their capital base and scaling up their lending to support regional banks.

The fall in the price of oil (and the reduction in oil revenues) has eroded the surpluses of oil exporting nations, lowering the funds they have to invest abroad in advanced economies and in emerging markets.  Furthermore the need for capital at home (to support domestic banks, finance fiscal stimulus packages, stabilize asset markets) and losses on past investments are leading sovereign investors to privilege liquid assets rather than the riskier assets like equity, corporate bonds and alternatives – which they tended to invest in until mid 2008.  The reduction in funds entrusted to the international banking system by countries like Russia and African oil exporters, some of which, the IMF suggests, were re-lent to Eastern European countries, provide further pressure on bank lending.  Governments of commodity rich countries are now having to take on a larger role in financing infrastructure projects that had been earmarked as public-private partnerships rather than making significant investments overseas. However, other investors like some of Chinese government institutions may be emerging to take up some of the slack.  China recently extended loans to several cash-strapped resource companies and may also be emerging as a source of investment to countries like Pakistan and Kazakhstan.

Eastern Europe

Eastern Europe’s heavy reliance on external financing may be its Achilles Heel, as it looks set to be the hardest hit of emerging market regions as such financing dries up.  Almost every country in the region is either in or close to recession, and the sharp drop-off in capital flows is both a reflection of, and a contributor to, the region’s deteriorating growth prospects.

For the last decade, a bonanza of foreign financing has helped the region grow faster than the world average.  The region’s capital account liberalization, financial sector reforms and its prospects for convergence with the EU made it an attractive destination for inflows.  But that ‘attractive’ status is changing, given the current environment of global credit tightening and given investors’ waning EUphoria.  Net private capital flows to the CEE-6 (Poland, Czech Republic, Hungary, Romania, Bulgaria, Turkey) are forecast to fall to around $60 billion in 2009, less than half that received in 2008, according to the Institute of International Finance (IIF).

Besides boosting growth, the stream of foreign capital inflows contributed to a build-up of external imbalances in recent years, specifically high current-account deficits.  Such deficits are the norm in the region, but the Baltics (Estonia, Latvia, Lithuania), Bulgaria, and Romania stand out for their sky-high deficits (in the double-digits as a % of GDP in 2008), making them particularly vulnerable to a drop-off in capital inflows.  While current-account deficits are expected to narrow across the board in Eastern European countries in 2009, the adjustment is painful and has led to concerns over a full-blown balance of payments crisis.  Latvia and Hungary have already turned to the IMF for financing.

While the region’s heavy dependence on foreign financing has been apparent for years, alarm bells were muted.  The rationale was two-fold.  One, the region was playing catch-up to the EU and current-account deficits were seen as a normal part of that process.  Two, the inflows to the region consisted of relatively ‘safe’ forms of financing.  That is, FDI – generally considered more stable and less susceptible to rapid outflows than other capital flows, like portfolio investment – accounted for the majority of inflows, although that is now changing.  FDI inflows covered almost 100% of the EU newcomers’ current-account deficits from 2003-2007.  However, in 2008, FDI coverage dropped to an estimated 55%, according to the Economist. The recession in Western Europe, the source of the bulk of the region’s FDI inflows, is not helping matters.

With the drop-off in FDI, debt – particularly intra-bank lending – has been financing an increasing portion of these countries’ current-account deficits.  Nevertheless, intra-bank lending – that is, lending between foreign parent banks and their subsidiaries in the region – is also set to drop off sharply in 2009.  Net bank lending to emerging Europe, excluding Russia, is projected to be a meager $22 billion in 2009, down from $95 billion in 2008, according to the IIF.  Foreign parent banks, who dominate the region’s banking systems, have pledged to continue to support their CEE subsidiaries, but the global credit crisis has made it difficult for them to maintain previous levels of lending.  With the slowdown in both FDI and intra-bank lending, central banks in the region are increasingly being forced to tap their foreign reserves.  As for growth, the sharper the decline in capital flows, the sharper the contraction in growth.  Future growth prospects hinge on a recovery in capital inflows to the region.

Emerging Asia

Private capital flows to Asia slowed sharply from US$315 billion in 2007 to around US$96 billion in 2008.  Risk aversion, de-leveraging and redemption by investors to offset losses in developed markets contributed to portfolio outflows of US$55 billion in 2008 and foreign bank borrowing slowed from US$156 billion in 2007 to just US$30 billion in 2008.    While these trends will continue to erode capital flows to Asia in 2009, albeit at a slower pace, even more resilient flows like FDI and debt inflows will take a hit also. South Korea, India and Indonesia are most vulnerable to capital outflows, however foreign capital fueled credit growth and lending to firms and households even in countries like Hong Kong, Taiwan, Singapore and Vietnam.  Therefore, the ongoing liquidity crunch will hit fixed investment, consumer spending, raise credit costs and bank delinquencies as well as undermine asset markets.

After emerging Europe, emerging Asia has been most severely hit by the decline in foreign bank borrowing especially firms and banks in South Korea, India, China and Indonesia which relied heavily on foreign capital to drive investment and consumer spending.  But despite having high external debt and short-term debt relative to foreign exchange reserves, countries like South Korea, India and Indonesia will be able to meet the debt obligations due in 2009 (over 50% of it to Western European banks) or even roll over debt.  After 2008 reversed the portfolio inflows of 2007, outflows might continue even in 2009 led by India, Taiwan and South Korea.  The main drivers will likely be domestic risks (GDP growth and export slowdown, lower corporate earnings, easing fiscal and external balances), not just global factors.  This might exacerbate equity market sell-offs in India, Thailand, Philippines, China, Vietnam, Singapore and Hong Kong so that valuations, in spite of being attractive in markets like Hong Kong, Indonesia, Singapore and Vietnam, might trend down further.

Fiscal stimulus and subsidy spending are affecting fiscal balances and raising external financing needs of countries like Malaysia, Philippines, India, Vietnam and Indonesia.  Others like China will boost domestic bond issuance.  While yields will go up, bond issuance might continue to face a tepid response due to risk aversion in EMs, flight to safe-haven (the U.S.!), narrowing interest rate differential with the U.S., risk of ratings downgrade, and expectations of limited currency appreciation in the near term.

The global credit crunch, high credit costs and export contraction have also taken a toll on FDI into Asia, a large share of which is export-related.  China, Indonesia, Malaysia and Vietnam where FDI accounts for a large share of total fixed investment, are most affected.  FDI to China began slowing in the second half of 2008, and has been declining for the last five months as the global outlook began to worsen, and revaluation expectations were reversed.  The decline in corporate profits though poses a bigger risk to investment as retained earnings are the biggest contributor to investment.  Moreover, large lay-offs across the world, especially in the West and the GCC will impact countries dependent on remittances such as Philippines, Vietnam and India, challenging the financing of current account balances and also domestic demand in some countries.

Capital outflows have pulled down most Asian currencies since 2008 led by South Korea, Malaysia, Singapore, India, Indonesia and Taiwan.  In response, many central banks like India, South Korea, Thailand, Philippines, Vietnam and Indonesia have run down foreign exchange reserves to defend their currencies.  And even Chinese reserve growth has been much more subdued, with the most recent numbers suggesting that China may have experienced capital outflows in several months in Q42008 and Q12009.  Amid dollar squeeze, countries like Indonesia have imposed restrictions on currency conversion and US$ outflows, while others like India have eased foreign investment rules to attract the much needed capital.  Waning capital inflows will put pressure on the BOP as shrinking exports affect the current account, especially for those running trade and/or current account deficits – South Korea, India, Thailand, Vietnam, Indonesia and Philippines and those running surpluses like China and Taiwan will run narrower surpluses.  Nevertheless, large foreign reserve accumulation and current account balances will contain risks of BOP and currency crises like in 1997-98.  Asian central banks have also been actively injecting dollar liquidity, entering swap agreements (South Korea, Indonesia, Singapore, Hong Kong), easing credit costs for firms, and expanding Asian reserve pooling under the Chiang Mai Initiative to relieve selling pressure on their currencies.  The expansion of Asian Development Bank’s resources, as advocated by the G20 will provide further financing to avert the reversal of other development assistance and avoid balance of payments pressure.

Commonwealth of Independent States

While Russia’s current account has yet to sink into deficit as the sharp fall in the rouble and lack of credit led imports to contract more than exports, a deficit is likely in 2009 if the oil price stays below $50 a barrel.  Furthermore portfolio and direct inflows have been reduced, leaving Russian corporates to seek funds from the government to meet their outstanding liabilities accrued when credit was cheap.  With the global IPO and bond markets frozen, Russia is trying to raise funds at home.  The government is stepping back from its plans to implicitly guarantee all the foreign liabilities, but it has provided significant funds to the banking sector and will increase spending to offset the withdrawal of foreign investment.  Some Russian officials find the ideal of capital controls very attractive, though Putin worries that it will offset the opportunity for the rouble to become a regional currency.

Like Russia, banks in countries like Kazakhstan and Ukraine borrowed heavily while international capital was cheap and have accumulated large foreign debts, many of which are coming due in 2009 and 2010. This has put pressure on the banking system that has been frozen out of international credit markets and is facing domestic liquidity shortages and the rising domestic costs of external debts after currency depreciation , which might increase defaults and lead to a pattern of non-payments.  The Ukraine with its wide current account deficit is particularly vulnerable and has turned to the IMF to avoid a balance of payments crisis. Kazakhstan by contrast will rely on its past savings and may seek Chinese funds.

Remittances are the largest source of external financing for many Central Asian countries, accounting for at least 20% of the regions GDP in total –  they account for over 30% of the GDP of Kyrgystan and Tajikistan.  The deteriorating economic situation in Russia, rising unemployment and the quota cuts for foreign workers have reversed migration trends and drastically reduced remittances flows to many CIS countries, in the face of current account deterioration as well as the social and political unrest that an influx of returning labor could trigger.

Latin America

Historically, Latin America was poorly placed to handle external capital market shocks, as it typically did little to save in expansion phases, remaining quickly vulnerable to deterioration in both real and financial external conditions.  Key parts of the region remain prone to these problems: both Argentina and Venezuela are now facing much more challenging conditions in an environment of lower commodity prices.  Ecuador has already defaulted.  By contrast, other countries in the region appear relatively well placed to handle global difficulties, in large part because of their relative prudence in the post 2002 global credit boom.  Foreign currency borrowing by the public sector was sharply curtailed (although not that by the private sector).  Owing mainly to a fall in commodity prices, the region’s aggregate current account will be in deficit of about $65 billion in 2009.  The accumulation of substantial foreign exchange reserves provides some leeway to finance the deficit, while reduced levels of dollar-denominated public debt allow currency depreciation to occur without raising solvency concerns.

In Brazil, the balance of payments printed only a slight surplus in 2008, US$2.9 billion compared to a huge surplus of US$87.4 billion in 2007.  For 2009, the data so far suggest a much weaker reading as well.  In fact total flow of FDI of only US$11 billion is expected in 2009, down from US$45 billion in 2008 reflecting the sluggishness of capital markets and the sharp contraction in the advanced economies, the main sources of those flows in the past.  At the same time, some recovery of portfolio flows is likely if there is a marginal bounce back in risk appetite vis-à-vis 2008.  Total capital and financial accounts inflow might amount to around US$17 billion, nearly matching the estimated current account deficit of US$19.2 billion, characterizing a nearly zero balance of payments for 2009.

Mexico experienced a significant decrease in FDI and portfolio inflows in Q42008 (-US$ 3.6 billion vs. US$ 11.9 billion in Q42007) as growth expectations for the U.S. and Mexico were revised significantly lower, credit conditions abroad tightened (deleveraging), and global risk appetite dried up.  However, assets held abroad increased sharply (by US$ 8.1 billion vs. a decrease of US$ 3.7 billion in 4Q07), thus compensating for the shortage in capital inflows.  Overall, the capital account ended up with a slightly wider surplus in 2008 (US$ 20.9 billion vs. +US$ 20.8 billion in 2007) and was enough to finance the much larger current account deficit (of US$ 15.5 billion vs. US$ 8.2 billion in 2007).  Although workers’ remittances are considered part of the current account, they are an important source of capital inflows and for the first time since 1995 they declined to US$25.1 billion in 2008 (US$ 26 billion in 2007).  In 2009, the current account deficit will most likely widen (US$ 25 billion). Pairing this with a flat capital account result in 2009 (US$ 21 billion), the balance of payment deficit should amount to roughly US$4 billion.

In Colombia, unfriendly growth and financial external conditions are impacting capital flows.  The most recent data (to February 2009) suggest an outflow of US$ 140 million vs. an inflow of US$ 1.75 billion in the first two months of 2008.  The central bank stated that the outflow was mainly explained by ‘other special operations’ (US$ 1.7 billion), which are most likely related to transfers to the treasury and the central bank intervention mechanism in the FX market (options) to control for volatility, among others.  Moreover, capital flows were impacted by a decline in FDI (32% to US$ 1.2 billion) and in remittances (7% y/y to US$ 800mn).

Africa

The reduction in capital flows, especially private capital and the fall in commodity prices is undermining Africa’s recent high growth rates.  With investors now fleeing to safe assets rather than seeking out yields, exotic investments like African equities and government bonds are finding it difficult to attract capital even as official sector flows also seem to be scaled back.  Official development assistance, FDI inflows and remittances that have contributed to financing current account imbalances in a number of African economies in recent years are set to drastically decline in 2009 threatening to offset economic gains they helped to achieve.  Furthermore commodity exporters like Nigeria who recently ran surpluses are now facing the prospect of current account deficits even as the reduction in energy and metals prices reduces FDI to the continent including in Southern Africa’s mining sector.

Estimates suggest that FDI to Sub-Saharan Africa fell sharply by about 21% in 2008, a trend likely to worsen in 2009.  This means that governments with ambitious investment and development programs will need to revise their current spending and financing plans downwards.  Furthermore with contraction in credit, and risk aversion, portfolio flows are increasingly difficult to attract, with outflows reported from most African exchanges.  Most of the region’s equity markets are dominated by domestic investors though but the reduction in global liquidity and bank lending has created vulnerabilities for banks, especially in Nigeria.  Overall, there were no international bond issues by African countries in 2008 compared with US$ 6.5 billion in 2007.

Remittance inflows from Africans working abroad, estimated at US$3 billion in 2007, are bound to fall because they originate from advanced economies that are experiencing deteriorating economic situations and rising unemployment.  Remittances between African countries (eg from South Africa to others) have also fallen along with the contraction in the mining sector.

The UN estimates that aid flows will need to double by 2010 to meet the cost of financing the Millennium Development Goals.  Yet core development aid has declined by 4% since industrialized nations committed to increasing it at the Gleneagles summit in 2005.  France and Ireland are considering cutting aid budgets as the cost of the recession rises and while President Obama pledged to double the country’s aid budget eventually the timeline is unclear.  According to the IMF a 1% drop in global growth leads to a 0.5% fall in growth in Sub-Saharan Africa but given the freezing of capital flows the effects could be more pronounced with the region likely to grow less than 3% in 2009.

31 Responses to “Reversal of Capital Flows in the Emerging World”

The AlarmistMarch 18th, 2009 at 7:45 am

Let us not lose sight of the fact that the commodities boom allowed a number of these unfriendly interests to arm and train over the past several years, and despite the recent pull-back they are still feeling thier oats. This includes our friends, the former USSR, who have been refining their tactics in live-fire exercises in places like Georgia.The next couple of years will be interesting indeed.O is nothing more than Jimmy Carter redux.

Daniel HerkesMarch 18th, 2009 at 8:07 am

I appears that the world is broke, and now the third world will suffer the consequences

The AlarmistMarch 19th, 2009 at 5:09 am

That’s rubbish … a lot of the wealth unlocked over the past two decades found its way into billions of hands in places like India and China, and global standards of living, although still relatively poor in some places, generally rose.

AnonymousMarch 20th, 2009 at 11:49 am

The World is not broke, it is the developed world that is broke.Aging nations, not able to support themselves, sitting on a heap of financial junk, are looking towards developing nations to save them.

PeteCAMarch 18th, 2009 at 8:39 am

Charts Worth ConsideringRe-Post from end of last threadTaking a look at a few key charts at the link below, with special thanks to Eric Janszen for publishing this info.http://www.itulip.com/forums/showthread.php?p=83348#post83348Note especially charts #1, #7 and #8 from this article.CHART #1: See that the green and blue lines are plunging on this chart. This dramatically demonstrates that consumer debt (green line) and business debt (blue line) are being reduced in a major way. Note that the consumer response leads the action – showing that this is a consumer driven pullback. The business contraction is really only just getting started. If this chart was extended right up to the current date – the trend would be even clearer. We’re headed for major cutbacks in capital spending and rising business bankruptcies. Notice also that the red line (Gov’t debt) is exploding upwards. Essentially what is happening is that the US Gov’t is trying to compensate for the reduction in private credit by expanding Gov’t credit. And the key question this time is: will the USA go under because of this behavior? Very possibly we could this time.CHART #7: Private pension funds … dropping dramatically. As one commentator noted recently – it’s not long before they start eating their own seed corn. These funds are on an unsustainable path towards major losses. Will pension funds be covered by the Gov’t? Sheeesh … isn’t everything apparently covered by the Gov’t now? Seriously, it just can’t be done folks. You’re looking at the Baby Boomers losing their American dream here.CHART #8: Wow! I knew that tax revenues were dropping, but are these figures right?? Even if this chart is not completely accurate, it points to a major dilemma (brick wall?) headed straight for state and federal governments. A very large drop in income from taxes. No need to spell out what this means. We are headed for draconian cuts in spending, and serious increases in taxation rates (not necessarily across the board). Governments can pretend that budget shortfalls don’t matter – but this goes out the window when we see these kinds of tax shortfalls.PeteCA

economicminor on the roadMarch 18th, 2009 at 9:18 am

Hi PeteCA,Nice link and good comments.What Herbert Stein wrote concerning unsustainable economics was that things just stop. At some point in the not to near future we will see the entire Obama Stimulus Bail Out Plan shown up for what it is, an unsustainable boondoggle. It will be a sad day in America when we have to admit our failures but we will have no choice.Our entire economic structure is built upon ever increasing debt and all those wonderful tax cuts that showed positive results were an illusion based on new debt rather than new productive capacity.Pension funds rely on someone paying for unsustainable debt, government relies on ever increased debt to pay for what they can’t tax. Debt debt debt all requires someone else to make payments … until Zero Hour was reached and now the payments are more than the income. The only possible way out now is to deleverage and that means dislocation and disruption. All those who rely upon someone else working and paying are all going to have to find a new way to sustain life.I’m on the road with millions of retirees who are living the vagabond life of Snow Birds in their huge fuel consuming dinosaurs, all living off the enterprise of someone else. All depending upon someone either borrowing or paying debts to sustain their way of life. It is all so unsustainable and the few I have talked to have no interest in economics or politics and just want to continue to do what they are doing. It is going to be a shock.From the road outside Albuquerque NW

PeteCAMarch 18th, 2009 at 9:28 am

I believe we’re approaching a magical limit in the global economy. Let’s call it “Pete’s Limit of Impossibility”. This happens when the rest of the world takes a look at the total debt commitments for the US Government – and finally throws in the towel i.e. the global market prices in the very real risk that the US Government is going to collapse financially.I think we’re pretty close to the Limit of Impossibility right now. To go over the edge, all it takes is one more really big bailout package by Obama and Congress. Or alternatively, maybe for Mr Bernanke to follow through on his statement this week to make an enormous purchase of bad assets from Citibank and BoA.Game over … is when the rest of the world acts as if the credit rating of the USA is no longer AAA. There is a stampede in outflows of foreign investments. And the US dollar plunges at that point. A crash.PeteCA

anotherthingmanMarch 18th, 2009 at 9:59 am

Pete,This argument makes sense strictly from an economic point of view, but would you concede that as long as America is the undisputed military power in the world, the chances of any country taking the actions you outline above are greatly reduced?It seems to me that without our military, this game would already be over. The world is cooperating (kind of), but only under the threat of dire consequences should they not.

atomicMarch 18th, 2009 at 11:31 am

Spot on. Economics is not independent of politics. US debt is AAA simply because the US maintains the financial order and, in the post-cold war period, is unchallenged militarily. If the US wants to invade a part of the world that is rich with oil, let’s say, so that this energy wealth is denominated and transacted in US dollars, it can do that. Russia or China are not in a position to invade the middle east and assert that oil be purchased with Yuan or Rubles.In order for “the world” (i.e. American financial colonies) to consider US debt not-AAA, it would have to assume that another power (or collection of powers) are prepared to challenge it in a shooting war.The post-cold war boom is coming to an end because the US is coming to the limits of what markets it can open, by force if necessary, to colonisation. Russia is finally pushing back in its periphery, and China is starting to flex its muscles in areas like Africa and Eastern Europe. Brazil is also being freed up to spread its influence in South America while the US is occupied elsewhere.All of this does not spell impending economic disaster for the US, it just means an end of the glory years of 1990-2009.

jugglingcdosMarch 18th, 2009 at 8:05 pm

So if China, Russia, Asia and EU stopped buying UST or using USD, US will bomb the world???is that feasible?? what are the implications?? US might win the war, but at what cost??Winning the war is one thing, but keeping peace afterwards is another..what good winning a war that you cant benefit from itI think Govts of the world are cooperating to maintain the status quo because they do not know whatto expect when the current system failed NOT because theyre afraid US will bomb them to smithereens

RalphMarch 19th, 2009 at 4:51 pm

Yes, the US dollar is becoming “worth less”, every other fiat dollar is also and equally “worth less”.I think what be taken from this is that serious inflation will be a worldwide problem at some point. If the US dollar remains as the trading currency for the worlds commodities, then most of the worlds citizens will not only have their own national inflation to deal with; but also the exported inflation of America.So the USA could do better than many, simply because of injustice.

PeteCAMarch 18th, 2009 at 8:51 am

By the way Prof Roubini … when you’re talking about reduction in capital flows to sub-Saharan Africa – what you’re really talking about is a local situation that’s moving towards food riots. Economic assistance and charity giving from 1’st world countries is also dropping.PeteCA

blindmanMarch 18th, 2009 at 9:00 am

http://www.bloomberg.com/apps/news?pid=20601087&sid=a0hyjGS2O3EI&refer=home.Geithner Vows to Recover AIG Bonuses Amid Outrage….”Geithner, who has come under fire from Republican lawmakers for not doing enough to stop the AIG payments, said in a letter to lawmakers last night the government will recover the money by requiring it be repaid from company operations and deducting the amount from the next $30 billion in aid being provided to the insurer. He also said the government will work to accelerate the “wind down” process of restructuring AIG.”.is this some kind of sick joke? we want these contracts/securities cds etc. disected in public. period. let us know what it is we are paying for.

REDMarch 18th, 2009 at 4:13 pm

Do we really care about a measly $160m in bonus’sthe real crooks are the one’s who paid out $160b in cds losses to investment banks.This bonus issue is merely a diversion from where the real money disappeared

PeteCAMarch 18th, 2009 at 9:03 am

Foreign Holdings of US DebtYou can find the “latest” data on who’s buying US debt at the following link.http://www.ustreas.gov/tic/mfh.txtThe table is always a couple of months behind. I don’t know if that’s because the friendly folks at the Treasury just aren’t drinking their coffee and eating their cornflakes in the morning. Or if they don’t really want people to know the most current trends in the data – until they get a chance to adjust to any changes.I continue to be amazed that the Chinese are buying so much debt from the USA. It makes recent statements from Chinese leaders, such as Premier Wen, look totally ridiculous. Who in their right mind doesn’t believe that the Chinese are going to lose an enormous amount of money on these debt holdings???Japan is holding about even on US debt holdings – they appear to be resisting any moves to go significantly higher.Interestingly, foreign hedge funds and middle east buyers (“Carib Banking Centers”) have started reducing their purchases since Oct/Nov of last year.A check on the T-Bill holdings shows a big ramp up in demand starting around October 2008. See the lower lines of the table for this info. It’s somewhat surprising that the rest of the world didn’t really get more nervous about this crisis until that time.PeteCA

GuestMarch 18th, 2009 at 9:22 am

agree-why do the Chinese keep buying so much US debt; have they been threatened with trade tariffs which would hurt them more than us or is it a way to ultimately control US policies and influence or have they just underestimated the length and severity of this recession? I hope NR will directly address this issue.

PeteCAMarch 18th, 2009 at 9:31 am

The Chinese have adopted “co-dependent behavior” in this game of global debt madness. They are acting just like the realative of an alcoholic – who keep buying the guy more beer, instead of dealing with the real situation. Interest rates on US debt should be rising substantially. Until the Chinese stop buying this debt, they are preventing the correction from taking place.PeteCA

GuestMarch 18th, 2009 at 10:15 am

“I continue to be amazed that the Chinese are buying so much debt from the USA.”One way to ensure they lose an enormous amount of money would be for them to stop buying. Remember debt to GDP during WWII was higher than today. Granted there are many differences with our economy today, but clearly they are hoping we can get our shit together and then raise taxes to pay them back. No?hlowe

GuestMarch 18th, 2009 at 11:12 am

yeah they would lose money if they stopped buying because that is the only way America has money to buy stuff.I thought capitalists were supposed to be an example to the rest of the world in how to run a country and create wealth?

atomicMarch 18th, 2009 at 4:10 pm

Brad Setser’s blog is a great place to get the answer to these questions:blogs.cfr.org/setserOver time I think this will change, though. China may not want to rock the boat right now, for fear of US retaliation in other areas, but it’s likely that they will eventually use their reserves in a more assertive, political way, much like how Russia came to the rescue of Iceland not too long ago. Then the real fun will begin…

PeteCAMarch 18th, 2009 at 9:12 am

Take a look at interest rates on corporate debt at this link (see below). Note especially the red curve in the first chart – which is the spread on interest rates for US companies with bad debt ratings. It is getting very costly to have a bad credit rating these days. Unfortunately, the large majority of American businesses do not have good ratings.http://us.lrd.yahoo.com/_ylt=Ai0864nuF_j258mRNX9ZLslH2vAI;_ylu=X3oDMTB0c2ZnYXB0BGlpZAMEbm9oAzUEcG9zAzEEcmlkAzE5NDE0NTM1/SIG=12v9k6i2r/**http%3A//feedproxy.google.com/~r/CalculatedRisk/~3/obvZ7kHvOwY/credit-crisis-indicators.htmlThanks to the folks at Calculated Risk for this data. It is 100% consistent with the other data I quoted above. There is enormous pressure on American companies to cut capital spending, budgets and employment right now.PeteCA

GuestMarch 18th, 2009 at 9:29 am

The Dodd amendment that permitted bonuses to AIG that was slipped into the Stimulus Bill” (IV) For any financial institution that received financial assistance provided under the TARP equal to $500,000,000 or more, the prohibition shall apply to the senior executive officers and at least the 20 next most highly-compensated employees, or such higher number as the Secretary may determine is in the public interest with respect to any TARP recipient. `(iii) The prohibition required under clause (i) shall not be construed to prohibit any bonus payment required to be paid pursuant to a written employment contract executed on or before February 11, 2009, as such valid employment contracts are determined by the Secretary or the designee of the Secretary.”http://thomas.loc.gov/cgi-bin/query/F?c111:8:./temp/~c111k6VOfS:e1272661:

GuestMarch 18th, 2009 at 10:31 am

the link above does not work – (time sensitive) to access the text go to the following linkhttp://thomas.loc.gov/cgi-bin/query/z?c111:H.R.1:the Dodd amendment is contained in Version 8 and is located at the bottom of the page under TITLE VII- LIMITS ON EXECUTIVE COMPENSATION

K in TXMarch 18th, 2009 at 10:53 am

$2 trillion more for TALF tomorrow. How is this “loan” to purchase toxic assets w/a Federal guarantee to cover potential losses different from just giving away money, or creating a “bad bank”? It seems like the potential risk to the investor is tiny, so why involve a third party if the government is on the hook for losses anyway? Seems like a crummy idea…maybe I’m missing something? Any chance this will trip “Pete’s Limit Of Impossibility”, or will it slip by due to lack of publicity?http://www.bloomberg.com/apps/news?pid=20601069&sid=avH0BzYVvyes&refer=fedwatch“Under the TALF, investors such as hedge funds would borrow $84 to $95 from the Fed for every $100 in ABS posted as collateral, meaning they will put up $5 to $16 of their own capital, depending on the type of security.Initial interest rates on the Fed’s three-year loans will vary from about 1 percent to 3 percent, also depending on the collateral. Investor returns will stem from the pricing of the securities. “

GuestMarch 18th, 2009 at 11:17 am

Bank of England has agreed to start printing up to 75 billion pounds in money to fight the recession.Would this affect the value of the pound or is it not much considering all other currency rate factors?

ramchandarMarch 18th, 2009 at 7:36 pm

what nonsense!! the external debt of india is 5% of gdp according to worldfact book oct 2008.